Page 252 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 11: Supply Chain Logistics Design

11.2.1 Factors Driving Global Supply Chain Management Notes

Most companies recognize the need to respond to shorter product lifecycles, increased customer
expectations, fluctuating inventory levels and changing costs. But a small number of companies
recognize the impact of that strategy on their supply chain, nor the shifts they will need to make
to move from simply being efficient and to becoming truly responsive.
The fast moving consumer goods, electronics, and petroleum industries reflected upon the
challenges of designing and optimizing a supply chain in today’s dynamic environment. The
challenges and how they have changed over time – executives from many firms around the
world are discussing on these issues. While they had often not organized their decision criteria
in the same format, most executives operating regionally and globally agreed with the general
shift, are convinced about the nature, importance and implications of the shift.
The shift and its implications for today’s logistics and supply chain have been mainly influenced
by the globalisation. The shift refers to the prioritization or importance of the factors driving
supply chain design. The major decision factors for global supply chain management include:
1. Demand Location: It refers to the geographic location and shipment profile (relative
volume, size and characteristics) of the market. All other things being equal, firms would
rather locate production and/or distribution centres near the consumer markets. The fact
that demand in Asia, India, South America, and Eastern Europe is growing at double digit
rates strongly motivates global firms to shift supply chain activities to those regions.
2. Labour Cost: It refers to the relative cost of production and distribution actions such as
manufacturing and handling. This factor is a driver of the move by many firms towards
low-cost-country production such as in China, India, and Eastern Europe. Labour cost
comprises direct labour rate as well as both benefits and assigned overhead cost.
3. Material Cost: It refers to the total cost of the raw material and workings, including both
the direct and indirect cost. The direct cost represents the specific purchase cost of the
material as well as the duties and packaging.

Did u know? The material indirect cost comprises the transaction and risk related
costs such as security, obsolescence, and potential intellectual property risks.
4. Transportation Cost: It includes the cargo cost required for obtaining raw material, moving
material between plants and distribution facilities, and ultimate distribution to customers
and consumers.
Tax structures and tax rates have at all times been design considerations, particularly when
selecting between alternative sites within a local geography. These tax incentives have frequently
been done through property tax allowances or holidays. While such tax incentives have been
used to attract facilities to specific municipalities within a specific region, it was not usual that
they could make enough difference to substantially change the region. Of late however, tax
allowances have been extended to include holidays from value-added, income, and duty payment
terms. As a result, the location of production and additional value added sites is now often
strongly influenced by regional and national tax strategies.

Example: Ireland’s use of reduced value added tax rates on manufacturing of electronics
and pharmaceuticals has done much to return industry and jobs to the Emerald Isle.
Similarly, Singapore has established tax advantages for goods that have value added activities
completed in Singapore. The value added activities could include everything from physical

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